40. All the American airlines go bust.
(Mr Smethers) Yes.
(Mr Baker) I think the pessimists would even say that
the Americans might not even come to the table at all. I think
there are signs that the Americans will engage. I think the optimists
have it at the moment.

Chairman

41. This throws up sharply the issue of the
dangers of phasing, of course. Let us not be as pessimistic as
ten years but let us say somewhere between two and five years
phasing would be an awful temptation. There is a tremendous temptation
to go for certain things in phase one and to take an awful long
time to get to phase two. This is a big issue for us.
(Mr Baker) When we have been negotiating bilaterally
with the United States, we have thought about the phased agreements.
The difficulty there is that some of the things we are asking
the Americans to do require legislation and so they cannot happen
instantaneously. What I have been urging on European colleagues
is not to rush into phases and the dangers of that because in
some ways it is very difficult to get a balanced agreement. If
you are going to have three phases, because you might not move
from phase one to phase two, or might not move from phase two
to phase three, you have to ensure that each phase is balanced,
and that trebles the difficulties if you have three phases.

42. It is very difficult indeed.
(Mr McNulty) There will always be this tension around
a quick result versus the comprehensive outcome in the end.

43. Where do you think, Minister, the Government
would be in that balance?
(Mr McNulty) We would be fully behind the comprehensive,
not so-called "open skies" view but the Open Aviation
Area view in all those elements, not least, as implied earlier,
that full and proper access to the American hinterland would seem
to be the priority aim.

44. Is that enthusiastic position shared by
our partners in the EU? In other words, is the potential for negotiating
differences to be between EU States and the USA, or are there
in fact differences in emphasis in the EU which might lead to
a different approach to phasing?
(Mr Smethers) Many of the States already have so-called
"open skies" agreements, so that that would be the first
phase for us, would it not? It would not actually be anything
for them one way or the other in moving to that because they are
there already. Therefore they might be less worried about moving
there than us because if the Commission came back and said, "We
are going to `open skies' for all countries", rather than
11 or 12 as it is at the moment, for them it is a matter of some
indifference. From that point of view, we have a more intense
interest than some of those countries.

Baroness Cohen of Pimlico

45. The other key issue in this, with which
I had enormous trouble, is the role of slots. What we have to
negotiate with, frankly, is a set of slots at Heathrow. That is
our US cue; that is what they will deal with. At the same time,
the Commission appears to be embarked on a process which will
take some of those slots away from us anyway. How does all this
tie together because it is our Heathrow slots that enable us to
lever this process forward because that is the thing the Americans
want?
(Mr Baker) We actually negotiate rights and not slots.
You are quite right that a number of countries do say, "What
good are rights if you do not gain the slots". That puts
us in some difficulties because we do not deliver slots. Slots
are actually allocated by an independent co-ordinator acting under
European law. A lot of countries find that difficult to understand.
I think people recognise the difficulties we have with slots until
we get the expansion in London and the south-east, if we do get
more in the south-east.

46. Never mind the south-east. We are thinking
of slots.
(Mr Baker) It is not just foreign airlines which obtain
slots; actually the UK airlines have to find slots. It meets the
rest of fair and equal opportunity. What we would like to have,
I think, is a transparent secondary trading system so at least
you can say to people, "If you do not get the slots you really
want, you can at least go into the market".

47. I am sorry, but that has not quite got to
where I was going, which is that there is this very useful negotiating
chip, control of which appears, as it were, to be being taken
out of our hands anyway.
(Mr Baker) I do not think it is part of the negotiation.
It is separate. When BA and American were looking for an immunised
alliance, then the competition authorities were actually going
to take slots away as the competition remedy, and slots would
have been made available to due competitors. Failing that, it
is not open to the UK Government to say, "I take slots from
you to make them available."

Lord Faulkner of Worcester

48. Can I press you a bit, Mr Baker, on what
you said about a secondary market for slots. By that, do I understand
you are advocating that if airlines choose not to use those slots,
they may be able to able to sell them on? Is that what a secondary
market is?
(Mr Baker) Yes.

49. Would it not be easier in the first place
if you had an auction and got the highest price for the British
taxpayer for some of those slots rather than effectively giving
the airlines the opportunity to make money on them?
(Mr Baker) That is a possibility. It has some attractions.
It is, however, governed by EU law and therefore, I think, to
change policy, you would have to persuade 14 or 24 other Member
States and the Commission. I think there is quite a lot of suspicion
within Europe about auctioning. We think a lot of the advantages
you get from auctioning would be got from a secondary trading
market, and that is probably a more realistic practical aim with
our European colleagues.

Baroness Cohen of Pimlico

50. Can I press you on this? We accept, do we
not, as it were, that slots belong to the airlines and that they
have property?
(Mr Baker) No, we do not accept that they have property
rights. The ownership of slots is very unclear. I think the best
I can do is to say that the Commission, from their own proposals
for amending Regulation 993 which governs slots, has said that
airlines have an entitlement to use the slots, provided they comply
with all the conditions laid down by the government and airport
authorities. I do not think I can do better than that.

Lord Faulkner of Worcester

51. If you win a scarce resource, you are able
to charge a market price for it. The point of my question was:
why should it be the airline that gets the benefit from a scarce
resource rather than the wider public good?
(Mr Baker) If your main aim is to get the most efficient
use of scarce airport infrastructure, and I think that probably
is the aim, then you have to create some incentive for movement.
If they had to hand them back without any consideration, they
would carry on flying into Heathrow. There are circumstances,
I think, of airlines, perhaps from a Balkan country, where it
would probably be nearly as good for them to fly to Gatwick as
Heathrow. If they are prepared to move out of Heathrow and go
to Gatwick and sell their slots, then the exchange is effected
and everyone benefits.

Baroness Cohen of Pimlico

52. So you do not accept that anybody has any
rights of ownership but it is quite a convenient assumption?
(Mr Baker) There is an entitlement to use, which therefore
does give them a right. It gives them something in which they
can actually trade.

53. Does the rest of the Community accept that
position?
(Mr Smethers) I think we should remember that the
whole idea of a market in slots is not favourably received among
most countries in the Community. I think this comes back to your
question. If you are going to auction a proportion of the slots,
that would mean taking slots away from airlines who think they
have a right to use them, and politically that would be very difficult
to achieve. What it might be easier to achieve is auctioning newly
created slots.

Lord Fearn

54. Or if you have just decided that the slots
would have been lost under the "use it or lose it" clause
this summer will be preserved next year because exceptional circumstances
could apply.
(Mr Smethers) Yes.

55. There could be a set of circumstances in
which slots will be lost because they have not been used?
(Mr Smethers) Yes.

56. Why cannot those be sold?
(Mr Smethers) They could be but, as I say, the whole
idea of any market mechanism in slots is not attractive generally
around Europe. We are very much in the vanguard of that, with
the Commission to some extent.

Baroness Cohen of Pimlico

57. So that, were the capacity to be increased
at Heathrow, it does not greatly help in some sense. There are
some more slots, only who is going to negotiate them?
(Mr Smethers) I think that is an issue that needs
to be resolved if there were more capacity at Heathrow.

Lord Fearn

58. Alternatively, if you decided to go for
a demand management policy on aviation in future, then presumably
the price of slots is going to be a fairly important part of limiting
that demand, is it not?
(Mr Baker) Yes.

Baroness Cohen of Pimlico: It is a bit like
beach huts!

Chairman

59. I think the relevance of this is that we
are all just avoiding I hope getting into a great lot of principles
about slots because that is clearly going to become an issue.
(Mr McNulty) That is one to which I think I shall
return!